Reduced tax refunds surprise Massachusetts taxpayers

Monday

Greg Tully is 71 years old and for the first time in his working life he will not receive a federal tax refund.

“Last year we got $631 back. This year we owed around $1,500,” he said.

Like Tully, of Saugus, thousands of taxpayers across the state are learning their refunds are smaller than years past, and some are finding they owe money. The IRS on Feb. 1 reported the average tax refund so far in 2019 had decreased 8.4 percent -- or $183 -- to $1,901 compared to 2018.

“A lot of people are very surprised with their refunds, or lack thereof,” said Paul Russo, tax director at The 1911 Trust Co., based in Beverly.

The shrinking refunds -- while not applicable to everyone -- largely stem from changes made to the federal tax code in 2017. Congress, then led by Republicans, passed the Tax Cuts and Jobs Act, which -- in addition to reducing the corporate tax rate to 21 percent from 35 percent -- lowered income taxes for about 80 percent of Americans.

But the controversial tax law, which received no support from congressional Democrats, also set a new limit on property and state income tax deductions and shifted how the IRS withholds taxes from paychecks, which have both contributed to smaller tax refunds this year and resulted in a lot of confusion.

Here are some of the reasons why your individual or family refunds could look different this year.

My refund is smaller this year. Does that mean I paid more taxes?

Not necessarily, tax experts say. A tax refund is essentially the difference between how much is paid and how much is owed. For most people, employers withhold income taxes which are collected by the IRS. At the end of the year, if you’ve paid too much, the government returns the difference in the form of a refund.

Last year, however, the IRS altered its “withholding tables” to more accurately align with the new tax rates created under the Tax Cuts and Jobs Act. The agency then recommended taxpayers review their W-4 forms to ensure enough money was being withheld to cover their annual tax bills. But many people didn’t hear about it or didn’t review their W-4s, and less money was withheld. The reduced holdings translated into larger paychecks, even though most people didn’t notice. And the scenario is playing out across the country, resulting in smaller refunds and even money owed.

Example:

2017

-- 2017 tax liability: $10,000

-- 2017 withholdings: $12,000

-- 2017 refund: $2,000

2018

-- 2018 tax liability: $10,000

-- 2018 withholdings: $8,000

-- 2018 tax bill: $2,000

I’m making the same amount of money. Why is more of my income getting taxed?

As many people are finding out, the new $10,000 limit on real estate and state income tax deductions is effectively increasing some people’s taxable income, especially for middle- and high-income families living in high-tax communities.

In some parts of Massachusetts, real-estate taxes alone can exceed $10,000, which means individuals and families are losing thousands of dollars in itemized deductions previously allowed under the old tax code. At the same time, mortgage interest can only be deducted on home loans valued up to $750,000 compared to $1 million a year earlier.

In response to a callout to readers, Mary Shaheen of Walpole said she sees the elimination of the itemized deductions as a huge hit to the middle class.

“Home ownership costs are huge and being able to fully deduct the mortgage interest, state income tax and real estate tax really makes a big difference to people who aren’t born wealthy,” she wrote in an email. “While not exactly the American dream, a lot of measured success was built around the idea of home ownership and an invested community of residents. A big incentive toward individual home ownership has been surrendered.”

It’s not all bad news, according to tax experts. More families and individuals with young children could see a boost in their refunds this year. The new tax law increased the Child Tax Credit to $2,000 per child under the age of 17, from $1,000 under the previous tax code. For a family with three young children, the tax credit would total $6,000. The credit, however, doesn’t apply to parents of adult children, which could result in less money since a personal exemption that allowed families to deducted $4,050 for each dependent claimed was eliminated. To help soften the blow, the new law nearly doubled the standard deduction to $12,000 for individuals and $24,000 for joint filers, which could help those whose individualized deductions fall short.

The Child Tax Credit is available to single parents who earned up to $200,000 and $400,000 for joint filers. Unlike tax deductions, which reduce the amount of taxable income, tax credits count against the amount owed to the IRS.

The Child Tax Credit is refundable up to $1,400, meaning some families could see money back depending on how many children they have and how much they owe.

Example:

-- 2018 tax bill: $1,000

-- 2018 Child Tax Credit: $2,000

-- 2018 tax refund: $1,000

What can I do to make sure I get a bigger refund next year and is that a good idea?

Nothing can be done about the 2018 tax year. But if people want larger refunds next year, the easiest solution is to increase the amount withheld from each paycheck.

The change, made to W-4s held by employers, would reduce the amount of money you receive each paycheck, but would increase the amount of your refund next year.

Some financial advisers and accountants, however, say receiving any refund isn’t necessarily a good idea.

“Why give the IRS an interest-free loan?” asked James Lagana of Accounting & Auditing Services LLC, which provides services to clients in Massachusetts, Connecticut and South Carolina.

The potential benefit to receiving more money up front is that it could go toward interest-earning accounts, including stocks, bonds and certified deposits. When held by the IRS, the government is essentially acting as a de facto savings account without interest.

But as Russo points out, not all taxpayers have the same financial goals, and ultimately it comes down to personal preference.

“It depends on the spending habit of the client,” he said. “A lot of people don’t mind giving the $2,000 to $3,000 extra so they can get a big refund check.”

Regardless, any adjustment that needs to be made should happen soon, Russo added, because the clock is already ticking for tax year 2019. He also recommends people who haven’t yet filed their 2018 taxes should do it sooner rather than later because this year’s refund will indicate what changes might be necessary for tax year 2019.

“By finding out earlier, you have more time to change your W-4, so it will take less money out each paycheck. If you wait until April, there’s only nine-and-a-half months left,” he said.

Eli Sherman is an investigative and in-depth reporter at Wicked Local and GateHouse Media. Email him at esherman@wickedlocal.com, or follow him on Twitter @Eli_Sherman.